“We told you this would happen if you play with negative gearing” – Dr Andrew Wilson + How to use gearing to grow your portfolio

Dr Andrew Wilson talks about his 2016 predictions and what impacted his views, what happened and how those actions will impact us this year.

Shannon Davis answers some of your questions and in doing so, he warns about believing everything you are told. Sharon asked us to help her understand how to gain benefit from the equity she has in her 1 bedroom unit to get another property.

John wants to know how he can buy a property in his son’s name, Joe has a beef about negative gearing and Dave needs to know about his options for funding the balance of a loan at settlement. So we asked Andrew Mirams to join us to help.

We back track with Josh Masters and check his report card of 2016 predictions.

Our feature guest tells about his passion for property and how that led him to create a Real Estate Agency – developed in his garage – that is solely devoted to helping other like-minded investors.

You will find us at iTunes under podcasts as Real Estate Talk. Listen there for free, leave a review which helps us grow and tells us what you like and how we can improve the show. Don’t forget to subscribe at the site as well –even if you do get the show through iTunes – so that we can tell you about the bonus offers we make to subscribers. Your questions are welcome through the site as well.

Transcripts:

Property gearing tips – Shannon Davis

Kevin: My special guest in studio is Shannon Davis from Metropole Property Strategists and Image.

Good day, Shannon.

Shannon: Morning, Kevin.

Kevin: Let’s get to a couple of these questions, Shannon. Interesting one from Sharon.

Sharon writes: “I have a one bedroom unit worth about $450,000 with no mortgage, and I’m thinking of using the equity in this property as a deposit for my next property purchase. What’s the best way to access this equity, and can I still claim the interest as a property expense? Is there anything different with accessing this equity as the unit has already been paid?”

Shannon: Yes. First off, congratulations Sharon for paying off your apartment. Yes, that’s definitely an easy one to do. What you’re looking for there is an equity release. We don’t want to give too much security to the bank, so we use the paid-off property and we take some seed capital out of that property.

Kevin: Normally, how much would you take? Is it a percentage?

Shannon: I think, yes, go for the deposit. With an equity release, you’re essentially borrowing the whole lot, so take as much as you need for a deposit and then see a separate bank for the investment property. It’ll be a full deduction but…

Kevin: Okay, so if Sharon’s going to go out a buy something with $600,000, she’s going to pull the deposit out of what she already has in equity in her current unit, and let’s say she’s purchasing something for, say, $600,000, just to give us a round figure. Would she pull out 10% or 20%?

Shannon: Yes, take $150,000 or so.

Kevin: Yes. Will the bank then want a hold over that entire unit?

Shannon: If you cross-securitize.

Kevin: Okay.

Shannon: What we’d suggest you do is get an equity release and see a different bank for that and use your equity release for the seed capital for the secondary purchase. It will be a full tax deduction, and the tenant is essentially going to pay about 75% of your expenses. From there, you have your property A securing that investment property and they’ll both appreciate.

Kevin: So effectively you’re borrowing the full purchase price but you’re doing it by accessing some of the equity you currently hold.

Shannon: Yes, that’s correct.

Kevin: Okay. Have you got any other recommendations for Sharon, by the way, because I cut across you there?

Shannon: No, but it’s a good thing to have done and you’re making your money work for you a little bit more. As long as you don’t give too much security to the bank. What happens then is the bank is going to be lovely and they’re going say, “Yes, we’ll give it to you” and they’re going to cross-securitize, which means if anything went wrong, they have full control of the sales of both properties. You don’t need to give them, say, a million dollars of security for a $600,000 purchase.

Kevin: You’re talking here about the both lenders.

Shannon: Yes, being cross-securitized with one lender I think would be the one thing to watch out for there.

Kevin: Okay. Who should Sharon be talking to about this?

Shannon: A good finance person – a person who’s probably more than just her existing bank manager.

Kevin: You wouldn’t go to the bank manager?

Shannon: Well, they’ll just tell you what’s in their best interest, really.

Kevin: Of course.

Shannon: Get a couple of opinions, and see what is best for you here.

Kevin: Is this where brokers start to come in now?

Shannon: Yes. Brokers have got access to the whole market rather than just what one bank specific offerings are. And it’s more than just interest rates, I would think, too. People get stuck on interest rates, but there are other facilities in a line that makes it more appealing.

Kevin: Like what?

Shannon: The option to have offsets, be able to pay it off sooner, perhaps locking a portion of your loan to fixed interest or letting it float on a variable rate. They are all things to be taken into account and a person needs to sit down with Sharon and see what’s in her needs and what’s the best fit for her.

Kevin: Would a broker be able to advise Sharon in relation to the entire loan now that we’re dealing the two lenders?

Shannon: Yes, definitely. Not just any broker; someone who specializes with investments and can tell you the ins and outs of the finance industry.

Kevin: How do you find one of those?

Shannon: They’re just going to take an interest in your needs as far as your timeline for investing, what you want from your life, and not just trying to transact and get a commission out of you.

Kevin: In other words, we’re not just looking for a solution to this situation; it’s more “Let me ask you some questions about you, what you want to achieve, and we’ll come up with a package for the whole thing.”

Shannon: That’s correct.

Kevin: You look at the whole thing as a picture.

Shannon: Yes.

Kevin: That seems to be more than way, too. I know that’s more developing a strategy, and I know that as a property strategist that’s what you guys do at Metropole. So you really have to come up with a strategy, don’t you?

Shannon: Yes, definitely. I think when people ask questions about what they’re trying to achieve? How long have they got to do it? Where are they in their working life? What serviceability do they have? And when you take in all those points of view, then you can have a property strategy at its highest and best use for your particular circumstances.

Buying a property for a minor – Shannon Davis & Andrew Mirams

Kevin: Before the break, we were answering that question from Sharon about finance brokers. Speak of the devil, we have probably got one of the best fiancé brokers in Australia, when it comes to investment loans, anyway. On the line, Andrew Mirams joins us from Intuitive Finance.

Good morning, Andrew.

Andrew: Good morning, Kevin. G’day, Shannon.

Kevin: Andrew, we have a number of questions for you that we want to deal with very quickly, but just in relation to that last question, you may not have heard it but Sharon was asking about a particular situation she has, and Shannon’s recommendation was that she deal with a broker who specializes in investment finance.

And I asked the question, how do you know that you actually have one? What is the difference between a bank manager, a finance broker and an investment strategist, like I imagine what you are, Andrew?

Andrew: It’s a great question, Kevin. There are lots and lots of brokers in Australia. There are actually 17,000 registered brokers.

Kevin: And that’s growing pretty rapidly too, isn’t it?

Andrew: Absolutely, yes. It’s fair to say that not all of those are specialists in certain areas. The majority of those would be what I would call a generalist – and they would be happy to do a first-home buyer loan, a top-up, a for renovation, or whatever it is – versus those who have larger businesses who actually are able to specialize in certain areas that they know their strengths are.

And that’s what we do. We focus on the areas of self-employed, which is a bit niche to market, and also the investment market, because it is different and the world has changed a lot in the last 18 months with APRA and the regulators cracking down.

I think you just have to ask the question “Do you deal in this market? What experience do you have?” A great question is “Do you have investment properties to sell?” being a practical person rather than a theorist.

Kevin: I want to get into it, because we’ve got you on the line for about the next seven minutes or so. A number of questions have come. We might not be able to get through them all, in which case, we’ll get you back.

One came from John: “I want to buy a property in my son’s name, a minor.” John asks: “Can I be a guarantor, get a loan from a bank and pay the monthly mortgage?”

Andrew: The short answer is no. As a minor, they can’t own property, they’re not legally responsible, and all the states and governments prohibit that. That’s the short answer; the long answer is it can be a little bit, again, strategic.

What John could potentially do – and what a lot of our clients have done in the past – is set up a trust. They’ll be the director and beneficiary of that, until such time as the child is 18. Then, they can simply resign, do a custody amendment, and hand the property over.

Now, the property would never be owned in the child’s name, but by handing over that third-party ownership, they’ll effectively become the owner entirely.

Kevin: Do you need to get a solicitor involved in drafting that?

Andrew: Absolutely, an accountant and/or a solicitor to set up the trust. It will cost you potentially somewhere between $1000 and $3000 to set it up, but it is the only way. The child actually has no ownership. Again, they have to be 18 and be deemed as an adult.

That’s the only way that we’ve seen some of our clients in the past do it with the sole intention that it’s going to be handed to the child once they become of legal age. There’s no stamp duty or transfers, because one party simply resigns and the other party is installed as the director and subsequently the owner.

Shannon: We’re really in an age of serviceability now when coming to investment finance.

Andrew: Absolutely, yes. It’s such a low interest-rate environment, and the markets have been so good in the last few years that the regulators and everyone, there’s a real strong crackdown and effort to make sure that people can service their loans.

Kevin: I have a question from Joe, to do with negative gearing. This is probably more of a statement, actually. He says, “The term should be abolished. It refers to legitimate claim against the losses incurred in the process of earning an income, which in turn is then taxed. It is compensation for losses against income earned, and is equally applied to business vehicles, tools of trade, self-education, uniform maintenance, and the list goes on. Why should property be singled out?”

We hear that comment quite often, too, Andrew.

Andrew: Absolutely. I guess the term negative gearing is just one that’s specifically allocated towards property. Anyone running the business who is earning an income can offset any of their costs or expenses that they need to run against that. Property is no different – whether it’s positive or negative. Often, it’s negative when you start out because people will gear and leverage, and then all the costs that go against that.

It’s been in the news for the last year or so with government talking about negative gearing and things like that. I don’t think we’ll see any changes in the near future. The term is irrelevant at the end of the day.

Shannon: It’s not really a strategy.

Kevin: No, it’s not a strategy.

Shannon: People say they want a positively geared property or a negatively geared property, but it’s more the size of your deposit, the interest rate of the day, the rent being received. A bit of confusion there, but for now, with those properties that don’t quite pay their way from the beginning, you’re getting some assistance from the government.

Andrew: Absolutely, Shannon. As you know, investing in property is all about wealth creation, not the tax effect. The tax effect or the tax outcome in the short term is just a byproduct of that.

Kevin: Let’s see if we can answer this next question. “I have recently sold my principal place of residence for $400,000. The current loan against the property consists of $297,000 personal debt and $62,000 equity loan that funded the deposit, etc. The deposit taken was 10% – $40,000 after costs, etc. The balance on settlement is not likely to cover the loan balance.

“My question is – and for the benefit of others – what options do I have to fund the loan balance at settlement – in particular, accessing part of the deposit held in the real estate agent’s trust account? I’m sure this is a regular question, a regular issue for Australians.”

Thank you for your question, Dave. What’s your answer to that one?

Andrew: Yes, and Shannon will be able to have a comment on this, as well. On the day of settlement, the deposit is also released, so the transfer of funds from the purchaser are transferred to the vendor, and that’s will clear the majority of the balance.

Where there is sometimes a small residual, on that same day, the balance of the deposit is also released, so the agent will be told whatever their fees and costs are, and then the balance of that is released to the purchaser straightaway.

Generally, that would clear the loan. If it doesn’t, there would have to be some sort of property… You wouldn’t want to leave it to the day of settlement. You should be a little bit more proactive and make arrangements well in advance.

Shannon: It becomes a problem with those properties that are sitting on negative equity, where people just get a little bit stuck. They can’t afford to sell in most cases because the selling costs and the balance of the loan won’t be covered.

Kevin: Andrew, we’re going to have to leave it there, unfortunately. We’re out of time, but I want to get you back again because there are probably another two or three questions I want to go through with you. I know you’re going to have a break next week – enjoy it; well earned – and we’ll catch up with you again in a week or two.

Andrew: Thanks, Kevin. All the best to you and Shannon.

Dr Andrew justifies his 2016 predictions – Dr Andrew Wilson

Kevin: In my regular show on the Macquarie Network, I had as my guest Dr. Andrew Wilson from The Domain Group, and I tackled him about his comments from this time last year about what he thought about the 2016 market. Just have a listen to what he has to say about the 2016 market. Just have a listen to what he has to say about his predictions.

Andrew, I want to take you back now. This is a little presentation I’ve done.

Andrew: Thanks a lot, Kevin.

Kevin: That’s okay. Have a listen to this:

Kevin: Andrew, fast forward through to January 2017, what do you think we’ll be saying about the year 2016?

Andrew: It’ll be less exciting in Sydney particularly and Melbourne in terms of the discussion point, and I think the outcome that we’re likely to see going forward is a much flatter cycle. I think that would have been validated through 2016, where prices growth on a quarterly basis really would have been just a bit above or below the 1% mark per quarter, depending on seasonal factors.

I’m not sure we have much wiggle room left ininterest rates, and any more cuts in interest rates would likely be a negative rather than a positive. We’ve seen continuous low growth in the economy. This is the future of really all our economies – national and state economies – reflecting what’s happening internationally, of course, and with low inflation and low incomes now translating into less of a cyclical element to house price growth, I think that’s what we would have seen crystalize over 2016 – a much flatter cycle.”

Kevin: We’re back live now, but that was a recording we did 12 months ago. Of course, we’re all surprised by what happened in Sydney. No one saw that coming. And I guess 2016 was the year of the unexpected – expect the unexpected.

Andrew: Yes, to a certain degree, Kevin. There’s no doubt that the markets picked up over the final part of 2017. In fact, the December quarter was clearly the strongest quarter for growth in most capital city markets for houses. But of course, units went the other way, and I guess when we put them all together, it flattens out to something around about 1%.

Kevin: Oh, nice twist.

Andrew: But there were some key “out of left field” drivers of higher levels of growth, and there’s no doubt that investors moving back into the market in 2016 was a key driver of a resurgence in prices growth in the Sydney market.

We had investors back, pushing up over 50% of market share in Sydney. Those levels obviously are such that would activate price, and there’s no doubt that not just interest rates, but the clear driver of that was the announcement by the Australian Labor Party that they were going to change negative gearing if they got into power.

That was announced in May, prior to the cut in interest rates. That’s when we saw a resurgence right across the board in investor activity, even in some of those weaker market, because it was that FOMO energy – fear of missing out – investors back in the marketplace after being sidelined by higher interest rates at the end of 2015.

And this just validated what I said all along about the changing the tax mix for property, you unleash potential for disruptions to the marketplace. That’s what we saw. We’ve seen higher prices as a consequence of that.

So even though at the time, of course, the ALP didn’t win the election, just the hint of a possible change to the property mix… And you have to remember that the LiberalParty just won that election – by the tiniest of margins. That was a very close call, so those who were perhaps speculating that property taxes would change and did get back on the market on the basis of that were working on the fact that the election result was a very close call, and the polls were showing at some stage that the ALP was ahead.

What I’m saying is it was just the prospect of the change to negative gearing that had investors – particularly in the Sydney market – rushing back, rolling in like the marines. That, of course, changed the whole market dynamic and pushed prices up.

The momentum from that was clearly evident right through to the end of the year. And of course, another two cuts in interest rates were part of that equation, as well. Momentum is such an important thing in housing markets.

All we have to do is look at the other end of the scale where the Perth market continues to decline, Darwin is flat. But other housing markets did get results very similar to 2015 in 2016, and quarterly growth rates were – plus or minus – around about that 1% mark in every capital city market except the Melbourne and Sydney markets. What’s driven the Melbourne market has been an unprecedented increase in migration into that marketplace.

Yes, a little higher than expected, but overall the same sort of energy has driven the market. But as I said, the clear lesson for higher prices in the Sydney market was don’t play around with the tax mix for property because you unleash the potential for disruptions to the housing market, and that’s what we saw after the second half of last year.

Kevin: A good message. I’ll give you the quote for next year now. This is what I’m going to replay back to you at the start of 2018 about what we will think about 2017.

Andrew: The other interesting point about the Sydney market is that when we look at the quarter-to-quarter growth rates annually – that’s a December quarter 2016 versus December quarter 2015 – we see that the Sydney market recorded a boom time result, and that’s over 10%. It was 10.6%.

But the reason it was so strong was because the last December quarter 2016 was a strong result, but the December quarter 2015 was the lowest quarterly result ever recorded by the market.

Now, if we take the annual growth rates of 2015, and that is all the house sales, the median of those over 2015, we compare the full 2016 medians, we see that the Sydney market actually grew on a year-on-year basis by 4%, which is 1% per quarter, which I think is exactly what I predicted.

Kevin: Which is what you predicted. So, in summary?

Andrew: In summary, this year, I think we’ll see similar energies. I do continue to believe that we’ll have lower and certainly moderating growth rates, similar to the last year. But the key driver of housing markets this year will be the disconnect between where banks situate their interest rates and where the official interest rates are.

I think that we will continue to see upwards pressure on interest rates from the banks regardless of what happens with interest rates from the Reserve Bank. So, I think that effective interest rates will continue to rise.

That is, even if the Reserve Bank cuts interest rates, the banks won’t cut them as much. And if interest rates stay stable from the Reserve Bank, I think banks will continue to increase rates, and that will only act to moderate prices growth.

So, I still think we’re looking at around about that 1% at best per quarter growth rate on average over the year. So, similar results again, flatter economy. You have to remember that we’re halfway to a recession at the moment.

The September quarter data was negative for the national economy, for the GDP. If we get a negative – which I don’t think we will; it’ll be close, but I still think we’ll be positive over the December quarter – if it’s negative, then we are notionally in a recession. So, that is certainly not the environment for higher house prices.

Kevin: No, indeed.

The success story that started in a garage – Jarrad Mahon

Kevin: My featured guest in the show this week is someone who’s passionate about property. That’s the kind of person I like to talk to. He’s the managing director and licensee of a website Investors Edge Real Estate based in WA.

Jarrad Mahon, thank you very much for your time. Nice to be talking to you.

Jarrad: Hi, Kevin. How are you doing?

Kevin: Good. We haven’t spoken for some time. In the passage of time, your business has grown and the property market has changed somewhat, Jarrad. But I’m really keen to talk to you about the Jarrad Mahon story more than anything. When did you decide to get into property investment? What was the story?

Jarrad: I was actually given a book, believe it or not, Rich Dad, Poor Dad, when I was 16 by one of my friends’ moms. I didn’t have a clue about investing or business or anything at that point. I read the book, and it just absolutely changed my whole world and paradigm. From that point, it’s been very difficult to see things the same.

Kevin: How old were you at that stage?

Jarrad: I was 16 years old, still in high school. I didn’t know how to even begin or where to start, but I just knew that I’d have to find my way out of the rat race, if you will, and I saw property and business as a vehicle to do it.

That just started a lifelong journey of learning and implementing and taking action and making a lot of mistakes as well as having some great wins along the way. Some 17-odd years later now, it’s awesome to see where I’ve got to and also really only still be beginning, relatively speaking.

Kevin: We’ll trace that journey in just a minute. Just taking you right back to the start, though, growing up as a child what were the conversations like in your household? Was it about property?

Jarrad: My parents had never done anything to that point, no. My dad was just a hard worker, didn’t really seem to get ahead, and we never seemed to have enough money. That lit a bit of a flame in me to try to change things. Because he was never around, I thought if I had money, I could have more time with my family, and that’s what has continued to drive me – not the money itself but that time to spend with people.

Kevin: Yes, what the money can get you. Jarrad, at 16 you get a book called Rich Dad, Poor Dad and that changes your life, you said. What feedback did you get from the people around you – kids at school – were they talking your kind of language?

Jarrad: No. It was pretty difficult because a lot of people will try to put you down and say it’s not possible. I guess even my parents were in that boat, as well. I just kept learning. I joined a lot of online chat forums and got a lot of help on there. I had a number of investors who really helped me out with advice at an early stage. I started making plans to do my first deal despite all that negative feedback and people just not understanding.

Kevin: What was the first property deal you did? How old were you?

Jarrad: I was 21. I wrote a little business plan, believe it or not, and I took it around to all my next-door neighbors. One of them was like, “I really think what you have in here I believe in and I’d be happy to give you the money, Jarrad.”

I told my parents that and they just freaked out thinking, “What the hell is in this business plan?” They ended up reading the plan and deciding that we’ve never done anything in property but if the neighbor is willing to give Jarrad some money, why don’t we go 50/50 with him. We ended up doing that, and so I got them into the property market, too, helping me making the first step.

Kevin: What an amazing story. That’s wonderful. Jarrad, tell me, do you still own that property? What happened to it?

Jarrad: That one, we put together some flyers because I had in mind to do a renovation. We put some flyers together and I paid my youngest brother – who’s five years younger than me – in lollies to go and drop them around the suburb that I’d chosen. He dropped them in all the houses that looked the worst in the suburb needing renovation.

I had a couple of people call me, and I ended up buying one of them under market value – and that was even by bank value. I think I bought it for $180,000-odd – and this is in 2004 in Perth, just off the top of my head back when prices were a lot lower – and the bank valued it at $240,000 at the time.

We did just a basic cosmetic renovation, and of course, it took longer than you think when you’ve never done it before and was harder than I’d thought. I thought, “Oh, yeah. Paint the house. We’ll do it in a weekend.” Four weeks later, you realize what the cost of your time and the cost of the professionals can be worth when you add up that time.

Kevin: A great learning experience, though, isn’t it?

Jarrad: Yes. There’s nothing like getting your hands dirty.

Kevin: That’s amazing that you actually turned that around. Tell me, what was in that letter that your brother dropped off?

Jarrad: It was basically “I’m looking to buy a property in your area. I have money ready. Give me a call. I can make a fast decision. Jarrad,” kind of thing. It was as basic as that.

Kevin: You were 21 at the time?

Jarrad: Yes.

Kevin: Goodness. That is amazing.

Jarrad: I’d only just got my first job that I could get some borrowings with, but I didn’t have a deposit or anything or money for renovation. My parents put in that money, and I got the loan in my name.

I think the value on completion – just off the top of my head – was $320,000 from that $180,000 purchase price, and we spent about $25,000 on the renovation. It was a good first step and helped me move forward. We ended up selling it three or four years later for $360,000. Yes, it was a great first deal for me.

Kevin: Tell me what happened when you turned up at those first people who responded to your letter and said, ‘Okay, come around and see us,” and a 21 year old kid turns up. What did they say?

Jarrad: I just panicked a bit, too. I actually purchased my second property the same way, and the people who rang on the second one – this is the next renovation I did – they rang from interstate and they said, “We want you to buy our house. The keys are in the mailbox.” I did the second one just completely over the phone and told them what price I’d be willing to buy it for.

In each case, I helped both of them out with moving forward quickly rather than having to go to the market and not be sure of what they’re going to get.

Kevin: When you think about it, your method of approach was one that’s probably going to draw those kinds of people – the people who are not necessarily desperate to make a sale but definitely want to sell – and you’re probably going to find that that’s pretty easy.

Did you use a solicitor to take these through the process?

Jarrad: Yes, I used a settlement agent, and I got their advice on the contract beforehand. Our system over here is a little bit different to the east, but settlement agents can provide you with all the conditions and clauses and other stuff. Then again, you don’t know what you don’t know when you’re starting out, so I didn’t have any of the more comprehensive conditions and other stuff that I include these days to protect me.

Kevin: Sometimes as you get more experienced, there tend to be more obstacles in the way. I’m not suggesting that what you’re doing now is wrong, but sometimes the simplest way at the start is the best way, isn’t it?

Jarrad: Yes, naivety and motivation can be your greatest strengths. I often think, “Gee, when I put all of my baggage and blockage and different thinking in the way, it does hold me back.” So I keep stripping it back to “How do I take action on this now and get as much as I can to make an informed decision about if it stacks up and you can pull the trigger on it” kind of thing.

Kevin: Of course, all of this was the foundation for Investors Edge Real Estate. When did you start that, and how did it kick off?

Jarrad: I’d worked a number of different strategies. I did renovations and then I moved into doing small subdivisions and a couple of small developments. I’d put together a group of fellow investors, and we all bought an apartment in Melbourne off the plan just as that was kicking up its growth period, as well.

In one of my deals, I made more than I had made in the whole year through engineering, and I thought, “Wow, if I can do this on the side of engineering, what could I do with all of my time rather than just spending a bit of time here and there?”

I had four property managers at the time, and I was also really frustrated because I was having to manage my managers and having to follow them up all the time. You’d send them an e-mail or call them and you wouldn’t hear back for a week. It was like “What am I paying these property managers for? They don’t think like an investor. They don’t understand investment. They waste my money. They cost me money by a whole range of things.”

It just inspired me to think. I looked around and there were no other investment real estate agencies in Perth. There was only one at the time. And I thought, “Wow, we can really focus on property management and help people make smarter choices when they invest.” That’s what we naively went about doing, too. I’d never started a business or done anything like that.

Kevin: A nice niche market there. What year was that, and how has the business grown since then?

Jarrad: It’s been an amazing journey. Put it this way: when I first started, I thought we’d open the doors and everyone would rush in. We prepared for six months and opened the doors and no one came.

Kevin: Funny about that.

Jarrad: Six months later, we had very few clients still and I ran out of money. I’d put a lot of money in to start the business, and we didn’t have any cash flow from the start. I’d run out of money, so I had to move back home. My parents had given away my bedroom, so I had to sleep on the lounge room floor. It was very humbling. It was winter. It was cold. Everyone would go in and out of the house through the lounge room, so there was no privacy.

This point, where it was testing me, I had to decide “Am I going to push through this or go back with my tail between my legs to engineering?” I just had that moment where you decide that regardless, I’m going to keep doing this and I love it. And thank God, I did have the parents’ floor to go back to because not everyone has that.

Kevin: Those moments when you have those voices in your head of self-doubt, you really have to punch through that, don’t you? Full marks to you for doing it. Was Investors Edge Real Estate the business at the time and you went back into it?

Jarrad: It is, yes.

Kevin: What changed? What did you do differently?

Jarrad: We went to that handful of clients and we decided to ask them how they wanted our service to be. We got feedback from them on all their frustrations with other property managers and sales agents in the industry, and we just started to design the service to give them what they want and really zone in on guaranteeing the right things to them because it kept us focused on it.

Probably the simplest thing that we’re most known for is our proactive communication guarantee where if we don’t return a call or an e-mail in the same business day, we pay people $100. All my team delivers to that, and it’s really altered the whole way we go about things.

Kevin: Quite amazing. So the business has grown, things are looking good. What would you say looking back now was probably the best deal that you have done?

Jarrad: I thankfully get to go through a lot of learning cycles with our clients. That was part of the reason I wanted to own a real estate agency. I still keep coming back to the small deals that you can control, that you don’t need commercial financing for.

The best one was probably one I bought in High Wycombe. I bought it just before a zoning change went through, so it immediately went from not being subdividable to being subdividable – not immediately but over six to nine months. We bought it just before it went through.

Once that zoning change came through, we were able to build a house on the back. And timing was just right for the area. There wasn’t much new housing in there yet. The shopping center was being upgraded. Some of these things we knew; some of them hindsight is beautiful and it’s nice to be on the right side of it.

Kevin: I guess for every good deal like that, there has to be a bad deal, too.

Jarrad: Yes. I could also fill up half an hour to an hour just telling you about mistakes and bad deals. You actually learn more from those of what to look out for.

Kevin: We learn a lot from other people.

Unfortunately, we are just about out of time, Jarrad. It’s great talking to you. Could I just ask you, then, what would be your advice to anyone who wants to get started to build their own portfolio? What would be the best advice you could give them?

Jarrad: The best advice is find other team members who you can leverage but don’t give away your decision-making to them. So learn, grow, get experts on your team, and speak to other investors, as well. The times when you’re down or you’re needing motivation, it’s great to hear someone else’s story and pull something from that.

I continue to do that today and keep finding better team members for my team, and I can be a lot of help for people here in Perth and be on their team for property management and property investment. That’s what I get a big buzz out of, too.

Kevin: We’ve had a great lot of fun talking to you and a lot of learning there, too. Jarrad, thank you very much for your time. Jarrad’s website is InvestorsEdge.com.au. Jarrad Mahon, thank you very much for your time, and all the best for 2017.

Jarrad: Thanks, Kevin. Cheers, mate.

“Still some money to be made” – Josh Masters

Kevin: Another one of the experts we checked in with this time last year was Josh Masters from BuySide buyer’s agents.

Good day, Josh. Nice to be talking to you again, and Happy New Year.

Josh: Good morning, Kevin, and to you.

Kevin: Actually, we’re pretty well into the New Year, but it’s never too late to say Happy New Year.

Josh, let’s just play a portion of what you said this time last year, and then we’ll come back and check in with you.

Josh: I think we’re still going to see the momentum from Sydney carrying through. While Sydney has had that very, very strong growth – and even Melbourne, as well – we’re still going to see probably 5% to 7% growth over the period as that markets slows down. There’s still some money left in there. I think we’re also going to see a rise in premium homes, let’s say above $1.5 million, probably in Sydney and definitely in Melbourne.

From an investment point of view, we’re going to see probably a lot more influence from those APRA regulations. What we’re probably going to see is a trend through 2016 to those affordable markets with stronger yields. I do see that Brisbane market and even the Gold Coast market through some of the infrastructure projects that are going in there. It’s been flat for so long. It’s a very affordable market especially compared to a lot of the eastern coast cities.

I think we’re seeing a lot of strong yields there, which are 5.5%, 6.5% there, which are really going to be attractive for investors through 2016. I think coupled with infrastructure projects from Toowoomba to Sunshine Coast down to the Gold Coast, I think that’s going to be a real hotspot coming up in 2016.

Kevin: Back live now. Josh Masters, they were your comments this time last year. There were probably a couple of surprises, but maybe we could just replay that again next year and that might be what you might think about 2017. Is that a fair comment?

Josh: Look, Kevin, I think it pretty much is a fair comment. There were definitely a few surprises. I think everyone’s jaws have stayed on the ground watching the Sydney and Melbourne markets continue to go very, very strongly.

5% to 7% growth coming into last year was well under the mark, but to be quite honest, that’s four years of solid growth now. I think it’s definitely unprecedented and we’ll probably see that sort of growth, if not less, for the Sydney and Melbourne markets – definitely in the investor side of it but probably also with owner-occupier markets coming into 2017.

Kevin: Yes, and it’s no wonder, too, that the state government in New South Wales is talking about ways to make property more affordable. Who would have thought that that growth would continue. In fact, I don’t think I’ve spoken to anyone who said what we’d seen in the last year – 2015 – was going to help continue in 2016. So who knows what’s going to happen in 2017 with Sydney.

Josh: Yes. Look, I think the affordability piece is definitely still on our radar. I mentioned that around the Brisbane market, and I think in particular pockets, we’ve definitely seen some solid activity and we continue to look up there because the yields are so good as well, and I definitely there’s some good infrastructure projects coming up that way.

But we’ve also seen some solid activity coming into the Hobart markets, the Canberra markets as well, particularly for the home sector because of that affordability. Hobart is almost going gangbusters now in terms of vacancy rates being so low, rental yields being very high, and capital growth as well, even though it is quite a small market.

I think that those affordable states will definitely be the outperformers as people are looking to put their money into the property market but simply can’t make it over the large hurdlers that are the Sydney and Melbourne behemoths that we see today.

Kevin: Yes, quite a number of the people that we’ve spoken to, probably like you too, have been a little bit disappointed with the growth that came out of Brisbane. I think everyone thought that 2016 was going to be Brisbane’s year but it just didn’t really… Although in fairness you can’t really compare with what continues to happen in Sydney, Josh, can you?

Josh: No, but you do have to be careful of using the same brush to tar the whole city and the whole state. There are definitely pockets within the Brisbane market that have been outperforming, particularly in the owner-occupier stock.

I know the banks have favored owner-occupiers since the APRA regulations came in a couple of years back. They were offering discounts or at least normalized rates, so we were seeing those quality homes close to the city in the $600,000 to $700,000 bracket doing very, very well. That was hitting 8%, 9% year-on-year and that’s nothing to shy away from.

But overall, yes, the state and the city, in particular, has definitely been dragged down, I think probably from the low unemployment rates and the low economic activity. The mining was always going to be a drag on it until we see the job numbers picking up in that state and the money starting to flow back in. I think we are starting to see a little bit of net migration flow back into Queensland now. I think that will be the catalyst for the rises to come that I think everyone’s been waiting for for some years now.

Kevin: Okay. Fast forward this time next year. What are you going to be saying in 2018 about 2017?

Josh: It’s always been a red flag for me for the last couple of years, but I think we’re definitely going to see some impact of oversupply in the unit sector, particularly for Brisbane and Melbourne. I think we will see those prices starting to hit home hard and there will be some discounts in that sector of the market.

The smaller states, where we have affordable stock – Hobart, Canberra, and look, fingers crossed for Brisbane as well – definitely down that more affordable end at the median price point or just under, I think we will see some activity there.

I think Melbourne and Sydney have definitely got to slow down. I think we’ll probably see them really staying static at the end of 2017. I actually foresee probably the same as BIS Shrapnel for the next one to two years following that – at least some very, very flat growth for those two larger states.

Kevin: Josh, always good talking to you, mate, and we will talk to you as the year rolls on. Josh Masters has been my guest. Josh’s website is BuySide.com.au.

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